Why digital payments are taking off in India

The rapid penetration of smartphones in India is leading to a rise of digital payments. CNBC’s Martin Soong has more.

Forget e-commerce, m-commerce is where India’s potential lies

For 32-year-old Varsha Deerpaul, shopping these days no longer involves weekend trips to her favorite mall in South Delhi’s Saket area.

Instead, she now indulges in retail therapy “mostly on the go” through her Samsung smartphone. For example, during her daily commute to work, Deerpaul spends most of her time browsing through the latest deals on e-retailers Flipkart and Jabong.

“If I wanted to buy a dress, I probably will have to check out many shops before deciding on one and that takes up too much time and effort. But now, I can easily browse through 20-30 dresses and there are discounts almost throughout the year. It’s really easy and by the time I reach my metro station, I would have decided on what I want,” the human resource senior executive told CNBC.

With consumers such as Deerpaul, it is little wonder that India’s e-commerce companies are racing to embrace mobile, with some ditching their web platforms entirely to go mobile-only such as online fashion retailer Myntra earlier this year.

Most recently, the country’s biggest e-commerce player Flipkart unveiled a new mobile website on November 9, which aims to give users an experience close to standalone apps.

“In July 2014, we had about 15 percent of transactions coming from mobile. In a year, we have gone from 15 percent to 70 percent. This kind of revolution is almost unforeseen and we have to come up with a whole new set of products to deal with that,” Flipkart’s chief product officer Punit Soni told CNBC in September.

Read More Snapdeal CEO: We will be India’s biggest e-commerce player

Drivers and limitations

According to a report released in April by market research firm Zinnov, India’s mobile commerce market could balloon to $19 billion by 2019, up 850 percent from its current size of $2 billion. Surging smartphone sales in the world’s second most populous country amid a tidal wave of low-cost handsets is the key driver, the report said.

Projections by Cisco put the number of smartphone users in India at 651 million by 2019, a near five-fold jump from 140 million by end-2014. The study, released in February, noted a 54 percent surge in the number of smartphone users in 2014 as the average price of handsets fell to around $150 last year and as smartphone penetration increases in rural India.

With the availability of cheap mobile data plans increasing, analysts believe this will help boost internet usage via mobile handsets — and consequently online shopping.

“India has a huge opportunity for mobile commerce. This is the first time a majority of Indians are getting connected to the internet. They are discovering products at costs that are lower than they’ve never seen before, and they are getting products that were not available in their market before. So it’s a huge opportunity,” FreeCharge’s co-founder Sandeep Tandon told CNBC.

Read More Flipkart founders debut on Forbes billionaire list

To be sure, obstacles that threaten to stymie the growth potential of mobile commerce in India remain aplenty.

For one, India’s focus on cash usage and security concerns about e-transactions are creating friction with the burgeoning online shopping market, analysts say. Large players are wary of the ‘Cash on Delivery’ system as it is manpower intensive, and requires time to collect the cash from the consumer’s doorstep.

In addition, India’s poor logistics infrastructure creates a challenge for e-retailers to offer quick delivery services, while the lack of stable telecommunications infrastructure across the country could also limit the pace of growth.

However, companies such as India’s second-biggest e-commerce player Snapdeal have taken the proactive approach by actively investing in solutions that will iron out these obstacles.

“Connectivity over telecom networks in India isn’t that great. So what we are doing is investing massively in building lighter apps [and] mobile sites that load up in three seconds even on a 2G network. It’s a lot of tech investments that we have to make, but we are seeing fairly exponential growth from mobile commerce,” co-founder and CEO Kunal Bahl told CNBC on November 18.

Others are hopeful, with recent government policies being supportive of developments in the mobile commerce space, particularly in paving the way for non-cash payments.

“There’s a lot of gap when it comes to understanding the digital space. Luckily the government has taken huge strides over the last six months to understand [the sector and] this is why they’ve offered more banking licenses. The recognition is coming so I think over the next year or so, we will see a huge amount of change and upward growth in the [mobile payment] space,” e-commerce consultancy eTailing ‘s founder Ashish Jhalani said.

In August, the Reserve Bank of India (RBI) announced that it plans to grant licenses to 11 businesses such as U.K. telecommunications group Vodafone and India’s Airtel to launch new so-called payments banks, which will allow transfers and deposits up to a limit of 100,000 rupees ($1,532) predominantly via smartphones. Analysts have widely viewed this as a significant shake-up of the country’s financial sector.

The next big thing?

With competition heating up, both established players and fresh entrants are seeking to differentiate themselves with a “new variant of mobile commerce” that moves beyond the retail realm, according to FreeCharge’s Tandon.

“Competition is so severe [so] not everybody is going to jump in and do mobile commerce [in the same] way… There are now service companies like UrbanClap [where] you can choose and hire a service professional to your house. For example, I’m invested in a company called Amber [which] is a platform for every stylist to become a business person and deliver the product to a customer’s house,” Tandon said.

Started in October 2014, hyperlocal start-up UrbanClap offers hiring services across categories such as health, home and events via its smartphone app. On the other hand, Mumbai-based mobile-first marketplace Amber taps on a pool of freelance make-up artists, hair stylists and henna artists to provide on-demand beauty services.

“These are new variances of mobile commerce which have not been so successful in the U.S. markets because [of] a lower population density,” he added. “But in India, a city like Mumbai has 20 million people.”

Read More Meet India’s home-grown IKEA

Paytm is also venturing into the hyperlocal commerce segment, as consumers get increasingly comfortable with the idea of making purchases with just the touch of a finger.

The Alibaba-backed firm announced last month it was partnering hyperlocal businesses BookMyShow and Zomato to roll out food ordering and table booking services, as well as deals available in a user’s neighborhood.

“India’s infrastructure may not be so highly developed, but it is developed compared to 5 years go and consumers are now more comfrtable with shopping from smartphones. India has leapfrogged from one generation so we might just leapfrog to another generation.” Paytm’s Sharma said.

Is India ready for a tech revolution?

Sandeep Tandon, founder of Tandon Group, explains how connectivity and an advancement in India’s tech sector will help businesses.

Freecharge Story

Early in 2015, Snapdeal acquired FreeCharge in the largest buyout in the largest Internet M&A in India at that time. The story of the FreeCharge journey is also the story of a great partnership among all key stakeholders.
Kunal and Sandeep and Shailendra talk about the mutual trust and understanding between them that helped build a special partnership.

The memories of our first meeting are still vivid. We started to pitch our concept and 20 minutes in, Shailendra told us he wanted to move forward. Kunal, being Kunal, kept going. I nudged him to stop since Shailendra was clearly sold on the idea.

The reason we chose Sequoia was not that they had the best terms to offer. It’s that we thought there would be comfort in working with Shailendra. We had to decide if we were willing to meet this person for the next five years.

Kunal is a philosophy major who dropped out of his MBA and had run a BPO business before. Sandeep had run an electronics manufacturing business and BPO business earlier. But they had all the ingredients of Sequoia founders – very committed, resourceful, independent minded, full of profound insights. I loved how Kunal articulated habit forming activities and the power of “free”. He went on to coin the term “habit commerce”. For us, it was a contrarian investment. After all, recharge was viewed as a commodity business. For a while, many people quizzed us on the FreeCharge investment but we knew that all new category creators look puzzling to outsiders in the beginning, so we kept at it.

We agreed on an arrangement that would give us half the money upfront and the other half later. Just before we closed, the rupee took a downward plunge. I got a call from Sequoia then – I was expecting them to ask for a renegotiation in light of the currency devaluation, but was completely thrown by what they proposed. They wanted to give us the entire amount upfront since the rupee’s future looked volatile. That’s been the tone of the relationship throughout – no game playing, no hedging.

We have never had a negotiation call with Sequoia. There have been multiple calls – but never a negotiation call. We firmly believed in our lead investor Sequoia and are confident that was a good decision on our part in all our rounds of investments.

When the investment was being discussed, there was agreement on the terms in five minutes. As the round sizes increased later on, Sequoia volunteered to remove its participating preferred security and change with non-participating preferred securities, as this was more company friendly and helped to bring in more investors at the same terms. This was one relationship when the short-term economic agenda did not matter, everyone was singularly focused on winning.

We ran into a couple of roadblocks in trying to scale. The biggest challenge was recruitment – it was especially difficult to attract talent in Mumbai. It was probably one of the worst periods for us as a business. It was comforting to have Sequoia tell us that we would get through it if we continued to focus on the important things.

I still remember what Shailendra said to me at that point: “Don’t worry about the fuel; just focus on getting the plane off the ground.” For a founder, someone showing faith in you during rough times becomes the biggest motivation. I remember sending Shailendra a text that evening saying, “ Thanks for having faith in me, I promise to make this big”.

We always had open discussions focused on what is best for the company. That helped us zero in on where we felt the gaps existed. For instance, we were able to study the situation objectively and open our minds to bringing in a CEO from outside the company.

We knew how to grow and monetize by then but we really needed someone to run the tech and product side of the business – to help us think more clearly about those aspects. And we didn’t want to let things such as rank and position get in the way of more important goals.

We were ready to help in the search for this person but we always told Kunal that it was ultimately his decision and his choice. That’s how Alok Goel, an ex-Googler, came on board. The fact that Kunal voluntarily ceded the CEO title speaks volumes for his maturity and magnanimity. Founders who are secure about their own contribution don’t care about titles.

Our conversations with Sequoia have always helped to clear the fog – whether it involved our initial business plan or the launch of our marketing campaign or the final sale to Snapdeal.

Each of us trusted the other side to do the right thing. This is one relationship where personal ego and economic agenda have never come in the way of the greater good.

It felt like we were one seamless unit and that was very helpful to us as entrepreneurs. It freed up a great deal of mental space and energy. We didn’t have to worry about what the board would say – just what we could say for ourselves.

Our board meetings were always extremely candid; we never had a investor-founder relationship. It was a discussion between partners about what was the right thing to do. That’s what we had – an extraordinary amount of trust. It made everyone want to give it their best.

How FreeCharge found its mojo, and Snapdeal

The inside story of the largest buyout in the Indian Internet market

Two weeks ago, Snapdeal acquired FreeCharge in the largest buyout in the Indian Internet landscape. In this account, Shailendra J. Singh , managing director of Sequoia Capital India, who saw FreeCharge from close quarters and served on its board, offers a ringside view of the company, its evolution and eventual sale to Snapdeal.

About 10 weeks ago, I remember picking up my phone to the usual buzz of a late night WhatsApp message from Kunal Shah, co-founder of FreeCharge. Over the last four years, my wife had become used to our frequent late night exchanges. I assumed this would be another quick discussion on business strategy or brainstorming a new idea Kunal had about the business. However, it soon became obvious it would be a longer conversation, because of a chat that Kunal had just had with his namesake Kunal Bahl at Snapdeal. The rest, as the cliché goes, is history.

The heroes of this story are Kunal and Sandeep Tandon, who co-founded FreeCharge in 2010. Kunal, a philosophy major, was running a BPO business owned by the Tandon Group. Kunal, who is always brimming with new ideas and creative answers to problems, came up with the concept of marrying mobile talk time with couponing. Sandeep provided the initial angel investment and brought to the table some key relationships in the retail industry. Like all good founders, they immediately launched a simple website with a simple value proposition—free coupons of equal value for mobile recharge.

I was among the few lucky ones who noticed. In those days, couponing was hot (think Groupon during its heyday) and FreeCharge felt like a clever proposition to sell a lot of coupons. I went to LinkedIn and mailed Kunal, first in December 2010 and then again in January 2011. I also requested an analyst from my team to cold-call him. We persisted for a while, but there was no response.

After a few weeks, we heard back from Kunal and Sandeep, and we agreed to meet. We still laugh about the first meeting. I asked them, “What is your CAC (customer acquisition cost)?” Kunal asked, “What is CAC?” They hadn’t spent any money on marketing yet.

I asked them whether they charge their big merchants like McDonald’s for lead generation. They hadn’t thought of that either.

Then I asked, “How many transactions do you do?” Kunal said, “14,000”.

I asked, “Every month?”

He said, “Every day, and they’re all credit and debit customers.”

Every e-commerce company was spending like crazy to acquire customers. I knew from my JustDial experience that customer acquisition engines can become very valuable. There were many questions to be answered, but by the end of that meeting, I told them we would love to invest.

We had found many of the soft ingredients we look for. An improbable set of founders with deep conviction in their approach. A product that needed no marketing to get tens of thousands of transacting customers. An incredibly grounded, creative and open-minded founding team, willing to learn about building a mobile and Internet business.

The only issue was that there was no business model yet. In fact, there was a widespread perception in the venture capital industry that recharge is a bad business because of low margins and supplier concentration. We saw things differently. This could be a customer acquisition platform, and potentially a Big Data play focused on user preferences and brand affinities. To us, mobile recharge was a means to an end.

We quickly put terms together. I remember Sandeep telling me, “Your offer seems fair. There is nothing to negotiate,” and I knew right away this would be a strong and uncomplicated partnership. Our relationship has stayed that way. I know people will find it hard to believe, but in the years that we worked together, there was never a difficult negotiation among us. And yes, such founder and investor relationships are not uncommon.

Soon after closing, we encountered our first major challenge. The technology platform was built in a hurry. Our users were experiencing failed transactions as we tried to grow faster. Kunal and Sandeep needed to hire a chief technology officer (CTO) desperately. We looked hard. However, finding CTOs in Mumbai is always tough, and our first hire didn’t last long. For several months, we couldn’t grow because our technology platform wouldn’t scale with our marketing ambitions.

After six months of struggle, things turned around when Deap Ubhi joined the team. Well known to Sequoia, Deap was the ex-founder of Burrp.com. The platform was rearchitectured so it could scale and the company agreed to move a significant part of operations and technology to Bengaluru. Transactions started to grow again in early 2013, and we regained confidence that this could be a large business.

However, start-up journeys are bumpy, and the next roadblock is never far away. By late 2012, we had run out of money, and the company was in an unproven category. We stuck to our original hypothesis though and Sequoia led an inside round, with participation from ru-Net and Ajay Agrawal of SirionLabs, a Sequoia entrepreneur, who liked the concept.

In end 2013, Deap had to return to the US with his family and we needed to hire another Internet leader. Kunal had got to know Alok Goel, an ex-Googler who had recently exited redBus. We worked hard to convince Alok to join FreeCharge. Kunal volunteered to step aside to make him the new CEO. Not just that, Sandeep and Kunal agreed to part with equity to make the offer attractive to Alok. They didn’t even bother to inform the board members of the promise they had made. These were incredible gestures. Few founders have the maturity to do what Kunal did, let alone volunteer personal equity to an incoming CEO.

A few weeks after Alok joined, in September 2013, FreeCharge launched a major TV campaign with Pepsi that Kunal had devised and convinced Pepsi to run. Top celebrities would ask consumers to drink Pepsi on TV in very attractive and fun ads, and get free talk time on FreeCharge. That campaign was a coup for FreeCharge, and won it immediate brand recognition. Alok organized FreeCharge in smaller pods around specific product and engineering issues, which accelerated the pace of progress. FreeCharge now started to aggressively hire and build out a team to focus on the mobile, and Kunal took on the mantle of driving growth.

In January 2014, when the company launched its new mobile app, it accounted for barely 10% of all transactions. But during 2014, mobile app transactions grew almost 50 times. FreeCharge raised two quick, successive rounds of financing, both with significant insider participation. After the company launched its first TV campaign in September 2014, FreeCharge became the No. 1 shopping app on Google Play, at least temporarily.

That did not go unnoticed. E-commerce firms had spent multiples more to drive downloads and transactions. And now, this upstart had taken the top spot within weeks of launching a TV campaign. It then became clear to everyone that recharge has significant potential to acquire online transacting customers fast.

The team was brimming with confidence on what the company could become. In an early 2015 board meeting, the management presented a plan to grow gross merchandise value almost five times in the next one year. And FreeCharge had $90 million (around Rs.560 crore today) in the bank to get there.

Enter another terrific Kunal—Kunal Bahl of Snapdeal. Both Kunals met up one day in late January, and what started as a let’s do more things together conversation quickly ended up in a this can be disruptive if we join forces meeting. Things moved fast after that. In February, the board of FreeCharge agreed to 21 days of exclusivity to put the two companies together. In 22 days, the largest Internet M&A (merger and acquisition) deal in India was signed and closed.

It was important to the board that this deal was a good financial outcome for as many people as possible in the FreeCharge team. While there are no perfect answers in such situations, we managed to achieve our objectives. For this alone, this M&A event probably stands out, as one where the whole team won, and the economics were generously shared by the shareholders.

This is a summary of many years of developments condensed in a few paragraphs. Many others deserve credit, and possibly some material events are missing. But FreeCharge had some interesting lessons that might benefit entrepreneurs and investors reading this account.

Kunal’s talent was realized when he was able to let go and create an institution that could help him achieve his goals. All founders face this challenge as they scale their companies. But Kunal was selfless and the lack of emotional insecurity helped him emerge into a wonderful leader. He did not have a title for 18 months after Alok joined, and he didn’t care. He worked insanely hard to grow the company at an exponential pace. In my mind, he is not only a talented entrepreneur, but also a great leader, and a brilliant mobile and Internet visionary.

It is very rare for us to find companies that have an anchor co-founder like Sandeep. He was never full-time, never drew a salary, and yet was always available for the most important projects. It is unusual to find an individual who brings a founder’s DNA without any baggage or agenda. Sandeep was the true quarterback who guided the team to achieve aggressive goals. This journey would be impossible without his massive contributions.

We always counsel our founders to believe great companies and great entrepreneurs can have room for co-founders at any point in the company’s life. Kunal, Sandeep and the board worked hard to embrace Deap and Alok as though they were co-founders. Building partnerships, treating people as peers of the founders and focusing on the company’s interest first made a massive difference. These relationships were not flawless, but they were very strong. And they helped to build a great culture even through the leadership changes at the company.

As for us, we are never on-field. We are cheerleaders and coaches and assistants on different days of the week. It wasn’t so much of what we did, but how we were able to partner with the founders and the team that really allowed us to have a successful partnership. We were lucky to have a very collaborative board dynamic, and an investor base that was very supportive. It was the strong trust and relationships that allow us to overcome many obstacles and get to a great outcome.

The story also appears on www.foundingfuel.com

Shailendra J. Singh, managing director of Sequoia Capital India, focuses on technology, Internet, mobile and services investments. Singh received an MBA with distinction from Harvard Business School and a BTech in chemical engineering from IIT Mumbai. He is also a Kauffman Fellow.

Manufacturers to the world

Our Special Correspondent

Fewer and fewer famous brands actually make what they sell. With protection laws in place, companies have begun to outsource. And it is here that Electronic Manufacturing Service companies are playing a stellar role, says M.L. Tandon, Head of Celetron India.

“NOKIA does not make the cell-phones that we carry around. It is the EMS (Electronic Manufacturing Services) companies that do the job for the company,” says Mr M.L. Tandon, Head of Celetron India, a fast-expanding EMS company located at the SEEPZ Special Economic Zone in Mumbai which is hopeful of becoming a billion-dollar hardware firm.

Not many would, perhaps, be aware of the stellar role that EMS companies play in the making of the modern world. These companies provide vital inputs to almost all modern gadgets that one uses.

Highly technical in nature and usually away from the public glare, these companies have been silently making a mark in the global market. One such company is Celetron India.

Celetron exports PC components such as power supply, head stacks for disk drives and memory cards, with a profit margin that has entered the rarefied 12 per cent region.

In an interview with Business Line, Mr Tandon speaks about the EMS sector and his company’s future plans. Excerpts:

What role is the EMS industry playing in driving modernisation?

Today, we are all very familiar with modern gadgets that define urban and modern living, such as the Palm PDA, the Nokia cell-phone, the IBM notebook and the Microsoft Xbox. These are high-technology gadgets and the brands are ubiquitous, but what many people might not know is that these products are manufactured not by the companies themselves but by a global industry called the EMS industry.

EMS can be termed manufacturers to the world. Fewer and fewer famous brands actually make what they sell. Previously, technology was not accessible but with protection laws in place, companies have begun to outsource. Manufacturing for these companies is becoming capital- and labour-intensive.

What are the advantages that EMS companies provide to the manufacturing companies?

Many advantages. These include rapid time to market as product lifecycle shortens, rapid time to higher volume, sharing of components, asset deployment flexibility, leading-edge manufacturing with reduction in costs, significantly reduced need for capital and provision of buffer to demand fluctuations in the user industry.

Can you tell us something about the evolution of the EMS industry?

The EMS industry has evolved from small- and medium-enterprise entrepreneurs, commonly referred to as contract manufacturers, to large service providers. Till the 1980s, the contract manufacturers limited their scope to a few specific functions, such as board stuffing. Over the years, the digital revolution expanded and demands from the consumer, telecom, computer and network companies increased significantly. As a result, these contract manufacturers started receiving more and more projects and indulging in end-to-end services.

How did the consolidation take place?

The 1990s can be termed as the decade of acquisitions for the EMS industry, as growth through acquisition was a strategic route adopted by the companies. Today, consolidation is in the form of larger EMS entities acquiring smaller competitors and buying their consumers’ factories at low prices.

Could you tell us something about the global EMS scenario?

The technology levels are high in companies catering to consumer electronics, communications, industrial electronics and networking and are by far the highest in medical electronics, automotive electronics and avionics industry.

A significant development has been that China has moved ahead because of the vast infrastructure availability; it is to be noted here that China has over 500 SEZs today while India has four.

What about the Indian scenario?

In the EMS sector, India can become the preferred alternative and thus emerge as a strong contender in the global market. I feel that Indian companies should equip themselves with technology, be well versed in design, new product innovation and complex technology. We need to avoid duplication of products and inculcate better financial discipline. Trust and transparency in EMS operations will bring increased confidence in outsourcing relationships. If these steps are taken, India stands the chance of becoming a global player in the world trade of electronics and information technology, which is projected to have an estimated market size above the $1-trillion mark by 2008.

What are Celetron’s plans?

We are expanding capacity to meet local demand. The Indian arm exports PC components, such as power supply products, head stacks for disk drives and memory cards. We plan to expand capacities, and we are in the process of setting up a production facility in Pondicherry. We hope to touch revenues of $1 billion from the domestic market and from exports.

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